A Quick Update for Employers on the Earned Income Tax Credit

employees save on payroll taxesQ. Is the Earned Income Tax Credit going away?
A. No. The EITC, also known as the EIC, which was enacted by Congress in 1975 to help low-income workers, has not gone away. But the AEITC has.

Q. What was the AEITC?
A. The Advanced Earned Income Tax Credit program was designed to give qualified employees a tax credit that was distributed throughout the year in their paychecks. This option has gone away as of Dec. 31, 2010.  

Q. Why did the advance option go away?
A. The law changed. Workers didn’t take advantage of the advance option as much as the government had hoped. The Education Jobs and Medicaid Assistance Act of 2010 repealed the AEITC, and it became unavailable to workers in 2011.

Q. What will my employees do now?
A. Eligible employees can still get the earned income credit in a lump sum when they file their personal tax return. And if they received the tax credit in 2010, they need to report it on their tax return.

Q. What does it mean for me as an employer?
A. As an employer, you are are no longer part of the equation for your employees’ EITC. You no longer will calculate the tax credit in your employee payroll. Your payroll provider should have already updated their payroll software and forms to prepare for this change.You no longer need to give employees Form W-5 (Earned Income Credit Advance Payment Certificate); that form has been eliminated. However, you still must notify employees that they may be eligible to receive the earned income credit. (To find out if your employees are eligible, read Notice 1015: Have You Told Your Employees About the Earned Income Credit?)

You can satisfy the EITC notification requirement when you give employees their Form W-2 (required information is on the back of Copy B), or give them Form 797.

For more information, read our previous article on the earned income tax credit.

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